Nic Lenoir On Why The Euro Is About To Crash And Burn, And Why His Concern For The “New Normal” Is Not Slow Growth But Civil War

Wednesday, December 15, 2010
By Paul Martin

by Tyler Durden

From Nic Lenoir of ICAP

Today 6 countries in Europe were the theater of riots. I highlighted in the past that voting turn-out has been on the rise in the past 8 years after a steady decline the 3 previous decades. During the credit boom fat and happy citizens had no time to vote, too busy producing or even more so consuming. Now with unemployment through the ceiling and poor economic perspectives people have started voting again. The next step is that they realize that no one in the political spectrum currently has any guts or brain and therefore no one offers a real credible fair solution, at least for now. When they do they burn things up. Because things are a little worse in Europe economically, and because the people there actually do realize the people in power are monkeys, they have now reached that stage of realization where burning things up is the logical response. Don’t think the US will remain immune to this symptom of the new normal (unlike El Erian I have not revised up my forecast, and my concern is not slow growth but civil war). For proof there was a viral video going around yesterday with a man threatening a school board with a gun after his wife lost her job, and it sadly ended in a shooting. Sadly I have very much expected these incidents to become common place and it is certainly going to get a lot worse. I almost wonder if the most fair, clairvoyant, charismatic, and pro-active politician could help us prevent true chaos. I suppose the real question is will someone come along directing the blame abroad to deflect the anger of civil unrest towards an international war. Do not shoot the messenger, I am simply outlining what I consider the most likely scenario. I pointed out in 2008 that the two biggest market crashes of the 20th century were 1907 and 1929… it does not take a genius to do the math.

Looking into what chaos will look like for the financial markets, the elephant in the room is the Euro. The only way it survives in any form is if countries start defaulting. Until then the problem will not go to rest. I strongly believe that defaults are much like treating generalized infection by cutting the worst looking limb. The problem is at the core, in the way it is designed: you cannot manage drastically different economies of countries with dramatically different cultures and laws using the same currency and interest rate curve. Defaulting takes care of the current debt accumulation by poorer countries trying to keep up with the Euro (not benefiting from the tailwind of currency debasement to boost prices in nominal terms they accumulate debt). However the fact is they will find themselves in the same predicament in 30 or 40 years at the latest for the same reasons. But by the same token I do think defaults are necessary, whether it is via outright haircut on debt repayment or by breaking up the Euro with the debt being re-nominated in original currencies using the Euro conversion, in which case a subsequent and immediate currency bloodbath for the PIIGS would be the defacto default.

The Rest…HERE

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